The streaming wars accelerated in earnest during the pandemic. Demand for in-home entertainment surged as governments worldwide issued stay-at-home orders. Kids were sent home from school and workers home from offices, while entertainment venues were forced to close temporarily.
Against that backdrop, media companies thought it was an excellent time to invest in their streaming services. That's when Walt Disney's (DIS 0.18%) flagship service Disney+ gained prominence to challenge streaming pioneer and leader in the field Netflix (NFLX -3.92%).
Disney+ is gaining momentum on taking the leadership position, but Netflix might have a secret weapon to hold The House of Mouse at bay.
Image source: Getty Images.
Disney+ is briskly gaining on Netflix
Netflix boasts 222 million subscribers as of March 31, reflecting a 200,000 decrease from the same quarter the prior year. That is still ahead of Disney+, which had 138 million subs as of April 2. But Disney+ added 7.9 million subs from the preceding quarter.
To make Netflix's lead a little less comfortable, management noted it expects to shed another 2 million subs in Q2. Meanwhile, Disney has pointed out that it will add more subs in the second half of the fiscal year than in the first half.
So Disney is gaining momentum, and Netflix is slowing down. At this rate, Disney+ could surpass Netflix in a few short years. Indeed, Disney expects the flagship service will have between 230 million and 260 million subs by fiscal 2024.
However, the one factor that could change the game is launching a lower-cost, ad-supported version of Netflix. Disney+ is also planning an ad-supported version, but Netflix has the advantage here. Netflix has 148 million subscribers in regions with relatively higher per-capita income. Why is that important? Advertisers are willing to pay more money to get consumers' attention with higher purchasing power.
The geographical subscriber mix is different at Disney+, where 50 million of its subs are from regions that are generating $0.76 in average monthly revenue per user for the paid version. Therefore, it can be reasonably inferred that these subs will bring similarly low revenue levels for the ad-supported version.
Advertising revenue could boost Netflix's content budget
Netflix earned $29.7 billion in revenue in 2021 and spent $17.7 billion on content. If the ad-supported version helps it raise revenue, it can use those funds to upgrade the content budget.
NFLX Revenue (Annual) data by YCharts
Disney's business is more complex than Netflix, with legacy cable TV channels, movie theater distribution, theme parks, cruise ships, etc. The deep-pocketed House of Mouse has indicated it will spend $32 billion on content this year.
DIS Revenue (Annual) data by YCharts
Of course, content is what attracts and retains subscribers. A hit series or movie could induce signups, help implement a price increase, and create word-of-mouth buzz for the streaming service. Therefore, if Netflix stands to gain more from ad-supported versions, a portion of that incremental revenue could flow to the content budget, which will help retain and attract subscribers. It may stave off Disney+ from overtaking Netflix for at least a few more years.
